Substitutability of A Good
Goods that are completely substitutable with each other are called perfect substitutes. They may be characterized as goods having a constant marginal rate of substitution. Writeable compact disks from different manufacturers are often considered to be perfect substitutes. As the price of one brand of CD rises, consumers will be expected to substitute other brands of CD in a one-to-one fashion. This means that the total quantity of CDs purchased would not change.
Imperfect substitutes have a lesser level of substitutability, and therefore exhibit variable marginal rates of substitution along the consumer indifference curve. The consumption points on the curve offer the same level of utility as before but the compensation now depends on the starting point of the substitution. An example of such a product is the soft drink. As the price of Coca-Cola rises, consumers would be expected to substitute Pepsi. However, many consumers prefer one brand of soft drink over the other. Consumers who prefer Coke to Pepsi, for example, will not trade between them in a one-to-one fashion. Rather, a consumer would be willing to give relatively large amounts of Pepsi in exchange for relatively small amounts of Coke.
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